Proposed Regulations Address Foreign Tax Credit Rules

Dec 27, 2022

The IRS has recently issued proposed regulations relating to the foreign tax credit covering:

  • Guidance on the reattribution asset rule for purposes of allocating and apportioning foreign taxes
  • The cost recovery requirement
  • The attribution rule for withholding tax on royalty payments

Reattribution Asset Rule

The 2022 foreign tax credit final regulations provide rules for allocating and apportioning foreign income tax arising from a disregarded payment. Foreign gross income included by reason of the receipt of a disregarded payment has no corresponding U.S. item because Federal income tax law does not give effect to the payment as a receipt of gross income. The new proposed rules therefore characterize the disregarded payment under Federal income tax law for purposes of assigning this foreign gross income to the statutory and residual groupings.

These rules treat the portion of a disregarded payment, if any, that causes U.S. gross income of the payor taxable unit to be reattributed as a “reattribution payment” under either the rules for gross income attributable to a foreign branch in the case of a taxpayer that is an individual or domestic corporation; or the rules for gross income attributable to a tested unit in the case of a taxpayer that is a foreign corporation. The excess of a disregarded payment over the portion that is a reattribution payment is treated either as a contribution from one taxable unit to another taxable unit owned by the first taxable unit, or as a remittance of a taxable unit’s current and accumulated earnings.

Cost Recovery Requirement

Under the cost recovery requirement, the base of a foreign tax permits the recovery of significant costs and expenses attributable, under reasonable principles, to the gross receipts included in the tax base. The proposed regulations provide additional guidance with respect to whether the test is met in certain cases where foreign tax law contains a disallowance or other limitation on the recovery of a particular cost or expense that may not reflect a specific principle underlying a particular disallowance in the Code. The proposed regulations also provide that the relevant foreign tax law need only permit recovery of substantially all significant cost or expense, based on the terms of the foreign law. A safe harbor is provided for applying the requirement.

Attribution Requirement for Royalty Payments

The attribution requirement allows a credit for foreign tax only if the country imposing the tax has a sufficient nexus to the taxpayer’s activities or investment in capital. Under the source-based attribution requirement, a foreign tax imposed on the nonresident’s income on the basis of source meets the attribution requirement only if the foreign tax sourcing rules are reasonably similar to the U.S. sourcing rules. With respect to royalties, foreign tax law must source royalties based on the place of use of, or the right to use, the intangible property, consistent with how the Code sources royalty income.

The proposed regulations provide an exception (the single-country exception) to the source-based attribution requirement if a taxpayer can substantiate that the payment on which the royalty withholding tax is imposed was made pursuant to an agreement that limits the right to use intangible property to the jurisdiction imposing the tested foreign tax. The exception applies only when the taxpayer has a written license agreement that meets certain requirements.

The proposed regulations also modify the separate levy rule to provide that a withholding tax that is imposed on a royalty payment made to a nonresident pursuant to a single-country license is treated as a separate levy from a withholding tax that is imposed on other royalty payments made to such nonresident and from any other withholding taxes imposed on other nonresidents.

William Vaughan Company will continue to monitor proposed changes on foreign reporting. For immediate questions or concerns, please contact our team of experienced tax professionals.

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Categories: Tax Compliance


IRS Tax Update: Filing Deadlines Extended to February 15, 2023 for Hurricane Ian Victims

Oct 04, 2022

On September 29th, the IRS announced Hurricane Ian victims in the state of Florida will now have until February 15th, 2023, to file various federal returns.

The tax relief measure applies to businesses and individuals operating and residing in areas designated to receive disaster relief from FEMA. Those eligible must also have had a filing deadline of September 23rd, 2022, or later. In other words, any business or individual in the state of Florida that filed to extend their 2021 federal tax returns out to October 17th, 2022, will now have until February 15th, 2023, to file any returns or taxes.

For businesses, the extension relief will also apply to quarterly payroll and excise tax returns normally due on October 31, 2022, and January 31, 2023. For individuals, the tax relief applies to any quarterly estimated income tax payments due on January 17, 2023. Additionally, penalties on payroll and excise tax deposits due on or after September 23, 2022, and before October 10, 2022, will be abated as long as the deposits are made by October 10, 2022.

The IRS will automatically apply this relief measure to taxpayers with a record of address in the disaster area, meaning there is no need to contact the agency directly. However, if an affected taxpayer receives a late filing or payment notice (that had an original or extended filing, payment, or deposit due date falling within the postponement period,) the taxpayer should call the number listed on the notice as soon as possible to abate the penalty.

For more information on the tax relief measure or to see if you qualify, contact your trusted team of tax professionals at William Vaughan Company as we continue to monitor IRS updates and the situation in Florida.

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Categories: Other Resources, Tax Compliance, Tax Planning


Everything You Need to Consider About the Advance Child Tax Credit Payments

Jul 16, 2021

As we are heading into the second half of 2021, individuals are now starting to receive their advance Child Tax Credits payments as a result of President Biden’s American Rescue Plan. The law, signed in March, increases the overall child tax credit, expands it to include children turning 17 this year, and adds another annual $600 benefit per child under six years old. While the advance payment on the credit may be a welcomed windfall, there are some important aspects of this tax credit individuals should be aware of when receiving these payments.

Receiving Payments
Individuals with dependent children started receiving monthly payments on July 15th which are estimated to total half of the amount of their estimated 2021 Child Tax Credit. The other half of the Child Tax Credit will be received when the 2021 Tax Return is filed in 2022. Individuals are required to reconcile the payments received on their 2021 Tax Return so they should keep track of the payments received throughout the year and include that information with their tax documents.

Overpayment
If an individual receives more than what is due to them, they will be required to pay back the difference. This differs from the stimulus payments, where individuals were allowed to keep the additional funds. This primarily applies to those with a dramatic increase in income during 2021. An example of this scenario:

  • If your income level qualified you to receive additional Child Tax Credits in 2020, and your new income level in 2021 does not, you will have to pay back the money received in regards to the additional Child Tax Credit you no longer qualify for.

Increase in Tax Due
The advance child tax credit received will be in lieu of claiming the tax credit on the 2021 income tax return. Since half of this credit will be received by the time the 2021 income tax return will be due, the amount of the child tax credit will be halved on the 2021 Return. This means that there will be fewer credits to offset against the tax due, which may cause a higher-than-normal tax due, or decrease the potential refund some are used to receiving. This holds especially true for those with a dramatic increase in income for 2021.

Opting Out of Advanced Payments
If taxpayers do not wish to receive the advanced payments of the Child Tax Credit, they can elect out of them. Typical reasons for opting out of the advanced payment are as follows:

  • An individual normally has a balance due to the IRS after filing their taxes
  • An individual doesn’t claim a dependent every year due to shared custody arrangements
  • An individual’s dependent(s) is(are) aging out of the range of the credit
  • An individual prefers having a large tax refund

Anyone wishing to elect out of the advanced payments, you may do so by clicking this link and following the instructions provided.

Changing Bank Account Information
If taxpayers would like to learn how to change/update their banking or direct deposit information, click here.

New IRS Portal
The IRS is currently developing a portal in which a user can enter updated information impacting the amount of payment an individual will receive. A user can do all of the following in this portal:

  • Update marital status
  • Enter in children born in 2021
  • Re-enrollment into the Child Tax Credit if you were previously unenrolled
  • Adjust your income for the calculation of the Child Tax Credit

As previously stated, this portal is still in development but the IRS is looking to release this portal in the coming months. Reach out to your WVC professional for questions on your specific situation.

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Categories: Tax Planning


IRS Tax Filing Deadline Moved to May 17

Mar 18, 2021

Yesterday, the U.S. Internal Revenue Service (IRS) extended the federal income tax filing due date for individuals for the 2020 tax year to Monday, May 17, 2021. “This continues to be a tough time for many people, and the IRS wants to continue to do everything possible to help taxpayers navigate the unusual circumstances related to the pandemic, while also working on important tax administration responsibilities,” said IRS Commissioner Chuck Rettig.” While the deadline has been extended, there are some items worth noting:

  • The delay applies to individuals filing Forms 1040 and 1040-SR.
  • The postponement does NOT apply to first-quarter estimated tax payments for 2021. The deadline for such remains April 15. After that date, interest and penalties on unpaid amounts will apply.
  • The extension also does NOT include fiduciary (trust) income tax return
  • It does NOT change the deadlines for corporate, partnership, or nonprofit tax returns.
  • The deadline to file the 2020 tax return remains Oct. 15 for taxpayers who file Form 4868 to request an automatic extension. The deadline to submit this form is now May 17, not April 15.
  • Recent law changes allow an exemption of up to $10,200 of unemployment compensation. If you received unemployment compensation last year and already have filed your 2020 tax return, the IRS strongly urges you not to file an amended return from federal tax but the IRS hasn’t announced what steps to take but plans to do so soon. For those who haven’t yet filed their 2020 returns, the IRS released guidance on March 16 that includes a worksheet and instructions to claim the exemption

Some state agencies have followed suit in extending the deadline.  We expect more states to push back their tax filing deadlines but recommend each taxpayer check with their state agency for any state tax deadline extensions.

Finally, while the deadline has been extended, we highly recommend taxpayers get their documents to their CPA and file as soon as possible, especially those who are owed refunds. Filing electronically with direct deposit is the quickest way to get refunds, and it can help some taxpayers more quickly receive any remaining stimulus payments they may be entitled to. If you have any questions, please reach out to your William Vaughan Company advisor at 419.891.1040 or check out the IRS news release here.

Categories: Tax Compliance, Tax Planning


Small Business Audits to Increase by 50% in 2021

Jan 26, 2021

As many small businesses are already preparing for complex accounting issues as a result of COVID-19 relief funds from the 2020 CARES Act, the IRS announced their intent to increase audits by 50%.

These audits and their repercussions could be targeted at businesses that have historically been overlooked including family-owned operations, online businesses created as a result of the pandemic, and investment funds.

De Lon Harris, the IRS deputy commissioner of examination for small businesses, recently noted, “[we] are focusing our efforts to increase compliance activity in this area of not only partnerships but also investor returns related to pass-throughs.”

The IRS can audit returns up to 3 years old, and if significant problems are found, are able to look further into past filings. With new audit procedures passed by Congress in 2015, the IRS is able to collect any underpaid taxes directly from the partnership instead of tracking down each investor. The agency is placing 50 new specialized auditors on these cases beginning in February in order to meet the projected increase.

Here are a few tips to prepare you and your business for the possibility of an audit:

  • Maintain clear records – Accurate and adequate documentation makes an auditor’s job easier and may reduce the chance of further inquiry.
  • Make estimated tax payments – Businesses expecting to owe more than $500 should be making quarterly payments. Failure to do so can increase your chance of being audited.
  • Impact of the Bipartisan Budget Act of 2015 (BBA) – Review of businesses’ formation documents, elections, and governing documents will help to determine if you will be subject to the Centralized Partnership Audit Regime and how it will impact your business.
  • Enlist the experts – Seek guidance from a CPA to ensure your returns are filed timely and accurately, to help you determine if estimated payments are needed, and to resolve possible red flags due to questionable reporting.

Should you have questions about your specific situation, please contact your William Vaughan Company advisor or reach out to our contributor, Juli Seiwert in our firm’s audit department.

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Juli Seiwert, CPA
Audit Senior Manager, William Vaughan Company
juli.seiwert@wvco.com | 419.891.1040

Categories: Audit & Accounting, COVID-19